Project cash flow Eisenhower Communications is trying to estimate the first-year
ID: 2717462 • Letter: P
Question
Project cash flow Eisenhower Communications is trying to estimate the first-year net operating cash flow (at Year 1) for a proposed project. The financial staff has collected the following information on the project: Sales revenues $25 million Operating costs (excluding depreciation) 17.5 million Depreciation 5 million Interest expense 5 million The company has a 40% tax rate, and its WACC is 10%. Write out your answers completely. For example, 13 million should be entered as 13,000,000. a.What is the project's operating cash flow for the first year (t = 1)? Round your answer to the nearest cent. $ b.If this project would cannibalize other projects by $2.5 million of cash flow before taxes per year, how would this change your answer to part a? Round your answer to the nearest cent. The firm's OCF would now be $ c.Ignore Part b. If the tax rate dropped to 35%, how would that change your answer to part a? Round your answer to the nearest cent. The firm's operating cash flow would ________increase/decrease by $ _________
Explanation / Answer
a. Estimation of the first year net operaitng cash flow:
b. Cash flow from operations would increase by = 2500000(1-0.4)= $1500000
Total Cash flow from operations in the first year = 6500000 + 1500000 = $8000000
c. Cash flow pretax = $7500000
Tax @ 35% = $2625000
Cash flow from operations after tax = 7500000 - 2625000 + Tax savings on depreciation
= 4000000 + (5000000*0,35)
= $6625000
Cash flow from operations would increase by (6625000-6500000) i.e. $125000.
$ Sales revenues 25000000 Less: Operating Cost ex-depreciation 17500000 Less: Interest (not to be deducted as it is non - operative expense) - Cash flow before tax 7500000 Less: Tax @ 40% 3000000 Cash flow after tax 4500000 Add: Tax saving on depreciation (5000000*0.4) 2000000 Cash flow from operations 6500000Related Questions
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